Two Harbors Q2 2025: Unpacking Contradictions in Leverage, Risk Management, and Financing Strategy

Leverage strategy and risk appetite, spread sensitivity and market conditions, risk management and market opportunities, derivatives strategy, financing strategy and capital structure are the key contradictions discussed in Two Harbors Investment Corp.'s latest 2025Q2 earnings call.



Market Resilience and Portfolio Performance:
- Two Harbors experienced a total economic return of negative 14.5% for the second quarter, with a return on book value of negative 10.3% for the first half of the year.
- The decline was attributed to market volatility in early April due to fluctuating tariff and trade policies, which affected fixed income and equity markets.

Agency RMBS and MSR Markets:
- The company's portfolio included $11.4 billion in settled positions and $3 billion in TBAs, with an economic debt-to-equity ratio of 7x.
- The spread between 10-year and 2-year U.S. treasuries widened to 51 basis points, supporting attractive opportunities for RMBS and MSR portfolios.

Mortgage Originations and Servicing:
- Two Harbors funded $48 million UPB in first liens in Q2, up from $29 million UPB in Q1, outpacing the overall trend in mortgage originations.
- The increase in originations was driven by the focus on direct-to-consumer originations and recapturing loans in their portfolio that may refinance, despite low economic incentives for moving or refinancing.

Technology Investments and Expense Structure:
- The company is implementing AI technologies to increase efficiencies in its contact center and improve customer experiences, with an anticipated rise in expenses.
- Current expenses included servicing costs of $12.6 million, compensation and benefits of $12.7 million, and other operating expenses of $20 million, totaling $45 million in the second quarter.